Setting up your business

On this page you will find information about:

For income tax purposes, we define a business as an activity where there is a reasonable expectation of profit and there is evidence to support that intention. For goods and services tax/harmonized sales tax (GST/HST) purposes, a business can also include an activity whether or not it is engaged in for profit, as well as any regular and continuous activity that involves leasing property.

Registering your business

Not all businesses need a business number (BN) and program accounts. It is important to read Do you need a business number or a program account? before registering.

The BN is a nine-digit identifier for businesses to simplify their dealings with federal, provincial, and municipal governments in Canada. It aims to give each registered business its own unique number.

You only need a BN if you need one or more program accounts. A program account is an account you register for with the Canada Revenue Agency to deal with specific programs. The most common program accounts a business will need are:

If you already have a BN and you change the legal ownership or the structure of your business, you may have to register for a new BN. For more information, go to Changing your business status.

Business services and information

Business structures

Your choice of business structure will affect how you report your business income, the type of returns you complete, and many other aspects of your business.

To find out the impact each structure would have on your business, consult the following list below:

Sole proprietorship

A sole proprietorship is an unincorporated business that is owned by one person. It is the simplest kind of business structure.

The owner of a sole proprietorship has sole responsibility for making decisions, receives all the profits, claims all losses, and does not have separate legal status from the business. If you are a sole proprietor, you also assume all the risks of the business. The risks extend even to your personal property and assets.

It is easy to set up a sole proprietorship. Simply operate as an individual or as a registered, unincorporated business. If you operate as an individual, just bill your customers or clients in your own name.

If you operate under a registered business name, bill your clients and customers in the business's name. If your business has a name other than your own, you'll need a separate bank account to process cheques payable to your business.

How does a sole proprietor pay taxes on their business income?

A sole proprietor reports all revenue generated by the business and claims all expenses incurred to earn this income on their T1 income tax and benefit return. The net income (or net loss) forms part of the sole proprietor's overall income for the year.

Sole proprietors have to file a T1 return if you:

  • have to pay tax for the year;
  • disposed of a capital property or had a taxable capital gain in the year;
  • have to make Canada Pension Plan/Quebec Pension Plan (CPP/QPP) payments on self-employed earnings or pensionable earnings for the year;
  • want to access employment insurance (EI) special benefits for self-employed persons. For more information, see Guide T4002, Business and Professional Income; or
  • received a demand from us to file a return.

You also need to file a return if you are claiming an income tax refund, a refundable tax credit, a GST/HST credit, or the Canada child tax benefit. You should also file a return if you are entitled to receive provincial tax credits.

The list above does not include every situation where you may have to file. If you are not sure whether you have to file, call 1-800-959-5525.

Note

As a sole proprietor, you may have to pay your income tax by instalments. You may also need to make instalment payments for Canada Pension Plan (CPP) contributions on your own income. For more information, go to Paying Your Income Tax by Instalments.

When you file your income tax and benefit return, you must include financial statements or one or more of the following forms, as applicable:

We will also accept a computer-generated version of these forms.

Do you have to register for GST/HST?

You may be required to register for the goods and services tax/harmonized sales tax (GST/HST) if you provide taxable supplies in Canada.

For more information, go to Registering for a GST/HST account.

Partnership

A partnership is an association or relationship between two or more individuals, corporations, trusts, or partnerships that join together to carry on a trade or business.

Each partner contributes money, labour, property, or skills to the partnership. In return, each partner is entitled to a share of the profits or losses of the business. The business profits (or losses) are usually divided among the partners based on the partnership agreement.

Like a sole proprietorship, a partnership is easy to form. In fact, a simple verbal agreement is enough to form a partnership. However, most partnerships are governed by a written agreement setting out rules for partners entering or leaving the partnership, the division of partnership income, and other matters. If money and property are at stake, we recommend that you have a written agreement.

The partnership is bound by the actions of any member of the partnership, as long as these are within the usual scope of the operations.

How does a partnership pay taxes?

A partnership by itself does not pay income tax on its operating results and does not file an annual income tax return. Instead, each partner includes a share of the partnership income (or loss) on a personal, corporate, or trust income tax return. They do this whether they received their share in money or as a credit in the partnership's capital account.

Each partner also has to either file financial statements or copies of the forms listed above that apply to their situation (computer-generated version of any of these forms is acceptable).

A partnership that carries on a business in Canada, or a Canadian partnership with Canadian or foreign operations or investments, has to file a Form T5013, Statement of Partnership Income, for each fiscal period of the partnership where:

  • at the end of the fiscal period, the partnership has an absolute value of revenues plus an absolute value of expenses of more than $2 million, or has more than $5 million in assets; or
  • at any time during the fiscal period:
    • the partnership is a tiered partnership (has another partnership as a partner or is itself a partner in another partnership);

    • the partnership has a corporation or a trust as a partner;

    • the partnership invested in flow-through shares of a principal-business corporation that incurred Canadian resource expenses and renounced those expenses to the partnership; or

    • the minister of National Revenue asked in writing a complete Form T5013.

For more information, go to Partnership and information return filing requirements; or see Guide T4068, Guide for the T5013 Partnership Information Return.

Does a partnership have to register for GST/HST?

Since a partnership is considered to be a separate person, it may be required to register for and collect GST/HST if it provide taxable supplies in Canada.

For more information, see Guide RC4022, General Information for GST/HST Registrants.

Corporation

A corporation is a separate legal entity. It can enter into contracts and own property in its own name, separately and distinctly from its owners. It may have some of the following features:

  • It is a separate legal entity with a perpetual existence;
  • It can generally raise larger amounts of capital more easily than a sole proprietorship or partnership; or
  • The shareholders cannot claim any loss the corporation sustains.

When forming a corporation, the owners transfer money, property, or services to the corporation in exchange for shares. The owners are referred to as shareholders.

You can buy and sell shares in a corporation without affecting the corporation's existence. A corporation continues to exist unless it winds up, amalgamates, or surrenders its charter for such reason as bankruptcy.

You set up a corporation by completing articles of incorporation, and filing them with the appropriate provincial, territorial, or federal authorities.

How does a corporation pay taxes?

A corporation has to file a T2 corporation income tax return no later than six months after the end of every tax year, even if it does not owe taxes. It also has to attach complete financial statements and the necessary schedules to the return.

The tax year for a corporation is its fiscal period. For more information, see Corporation.

A corporation usually pays its anticipated taxes for the year in monthly or quarterly instalments. For more information on instalment payments and the filing requirements for corporations, see Guide T4012, T2 Corporation - Income Tax Guide, or Guide T7B-Corp, Corporation Instalment Guide, or go to cra.gc.ca/payments.

Filing GST/HST returns

Corporations also have reporting periods for which they have to file their GST/HST return. For more information on these returns, including reporting periods, go to Goods and services tax/harmonized sales tax (GST/HST).

Are you responsible for your corporation's debts?

As a shareholder of your corporation, you have limited liability. This means that you and the other shareholders are not responsible for the corporation's debts. However, limited liability may not always protect you from creditors. For example, if a smaller, more closely held corporation wants to borrow money from a bank or other creditor, the creditor may ask for the shareholder's guarantee that the debt will be repaid. If you agree to this condition, you will be personally liable for that debt if the corporation does not pay it back.

This applies to taxes owing as well. If your corporation owes taxes and has obtained a loan or secured a line of credit, an advance under the loan or line of credit can be intercepted on account of the corporation's tax arrears. Notwithstanding that the proceeds of the advance have been paid to the receiver general for Canada, the corporation is deemed to have received the advance and is liable to the lender as such. When you have personally guaranteed the loan or the line of credit for the corporation, you would be liable jointly with the corporation for the amounts intercepted.

Directors may also be liable to pay amounts owed by the corporation if it has failed to deduct, withhold, remit or pay amounts as required by the Income Tax Act, the employment Insurance Act, the Canada Pension Plan, the Excise Act, 2001, and the Excise Tax Act. For more information on director's liability, see Information Circular IC89-2, Directors' Liability.

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